Protecting Your Deposit Accounts

October 3, 2008

Susan B. Zaunbrecher , Brian C. Griffith


Given the current crisis in the financial markets and the passage of the Troubled Assets Relief Program by Congress, it is reasonable for prudent customers to be concerned about the status of their insured deposit accounts at various financial institutions. As most depositors probably know, the Federal Deposit Insurance Corporation (“FDIC”) provides insurance for deposit accounts at many financial institutions, and will now (through December 31, 2009) cover most deposits dollar for dollar up to the insurance limit of $250,000 in the event that an insured financial institution fails. However, it is possible for a depositor to qualify for more than $250,000 in deposit insurance at the same insured institution if the depositor utilizes deposit accounts in the different ownership categories that the FDIC insures.

Ownership Categories

By dividing their deposited funds at a particular insured financial institution amongst the various ownership categories of deposit accounts, depositors can maximize their deposit insurance coverage at that institution. Please note that it is the ownership category of the deposit account and not the type of account that entitles individuals to additional insurance. Thus, an individual owning a savings account with a $75,000 balance, a checking account with a $18,000 balance, and a certificate of deposit with $195,000 in his/her name alone will only be eligible for $250,000 of deposit insurance for all three accounts combined. The following is a list of the ownership categories of deposit accounts insured by the FDIC and a description of the deposit insurance coverage available for each.

Single Accounts

Single accounts are deposit accounts -- checking, savings, money market deposit accounts, and certificates of deposit (“CDs”) -- owned by one person and titled in the name of that person alone. For the purpose of determining the deposit insurance coverage available to a particular depositor, all single accounts, regardless of type, in a depositor’s name at the same institution are added together. The aggregate of all single accounts, regardless of type, eligible for FDIC insurance is $250,000. This means that an individual depositor cannot evade the insurance limits by dividing a deposit amount exceeding the insurance limits between different single accounts so that each single account contains an amount lower than the coverage limit. Instead, the depositor should spread the deposit among accounts in different ownership categories.

Please note that retirement accounts and qualifying trust accounts are not included in the single account category.

Joint Accounts

Joint Accounts are deposit accounts owned by two or more people, with each owner possessing equal rights to withdraw money from the account. Each owner’s percentage ownership of all such joint deposit accounts at a single insured institution is insured up to $250,000. So, if a married couple has a joint savings account and a joint checking account at the same insured institution, each spouse’s share of the accounts is insured up to $250,000 in aggregate, or up to $500,000 in insurance coverage combined.

For example, a married couple with $320,000 in a joint savings account, $40,000 in a joint checking account and $180,000 in a joint CD at a single financial institution would be eligible for $500,000 in deposit insurance ($250,000 each for their individual share of the combined account balance of $540,000), thereby leaving $40,000 uninsured by the FDIC. To be fully covered, the uninsured $40,000 should either be deposited in another account in a different ownership category (i.e., a single account in the wife’s name, a revocable trust, etc.) or deposited at another institution.

Revocable Trust Accounts

Revocable Trust Accounts are deposits held in either payable-on-death (“POD”) accounts or living trust accounts.

• Payable-on-Death Accounts -- POD accounts, also known as testamentary or Totten trust accounts, are informal revocable trusts in which the account owner signs an agreement indicating that the funds in the account will be payable to one or more named beneficiaries upon the death of the owner.
• Living Trust (or Family Trusts) -- Living Trusts are formal revocable trusts created for estate planning purposes in which the owner of the trust controls the deposits during his or her lifetime. (Please note that due to the potentially complex nature of living trusts, it is difficult to determine the exact insurance coverage available to any particular trust without reviewing the trust itself.)

Insurance coverage for revocable trust accounts is determined by the trust relationship between the owner and each qualifying beneficiary. If all necessary conditions are met, the FDIC insures up to $250,000 per qualifying beneficiary for each owner of the account. Please note that the owner is not entitled to coverage for his or her interest in a revocable trust account, only for that of each qualifying beneficiary.

To be eligible for deposit insurance, the revocable trust account must meet certain conditions including:

1. The beneficiary must be one of the following: the owner’s spouse, child, grandchild, parent or sibling (this includes adopted and stepchildren, grandchildren, parents and siblings, but not in-laws, grandparents, great-grandchildren, cousins, nieces or nephews).

2. The existence of the trust relationship must be indicated in the account title (such as payable on death, in trust for, trust, living trust, etc.).

3. For POD accounts, each beneficiary must be identified in the insured institution’s account records.

If any of the conditions are not met, any portion of the account that does not qualify for insurance coverage will be attributed to the account owner’s single accounts, if any, and calculated as part of that $250,000 insured amount.

For example, a married couple with two children who jointly own a POD account payable to their two children is eligible for up to $1,000,000 in deposit insurance on that account ($250,000 of insured deposits from each spouse to each child). The eligible amount could be greater if additional qualifying beneficiaries are named on the account.

Certain Retirement Accounts

There are certain retirement accounts that are owned by one person and titled in that person’s name which are eligible for deposit insurance. All such accounts held at an insured institution are eligible for an aggregate of $250,000 in FDIC deposit insurance. The following types of retirement plans are insured in this category:

• Individual Retirement Accounts (“IRAs”) including traditional IRAs, Roth IRAs, Simplified Employee Pension (“SEP”) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs;
• Section 457 deferred compensation plan accounts;
• Self-directed defined contribution plan accounts; and
• Self-directed Keogh plan (or H.R. 10 plan) accounts.

Please note that naming beneficiaries on a retirement account does not increase the FDIC deposit insurance limits.

Hypothetical Scenario

A married couple with two children owns a joint savings account with a $2.7 million balance. How can they allocate those funds in a manner that provides the greatest amount of deposit insurance?

Although there are numerous variations on how to accomplish this goal, one possible alternative is as follows:

1. As joint owners of the savings account, the couple is insured up to $500,000 in the joint account.

2. Additionally, the husband and wife could each open a single deposit account eligible for insurance coverage of $250,000 in each account.

3. Also, the husband and wife could each open a POD account naming the other as beneficiary which is insured up to $250,000 each.

4. Further, the couple could open a joint POD account naming each of the children as a beneficiary insured up to $1,000,000.

In this scenario, the couple would be eligible for an aggregate of $2.5 million deposit insurance coverage. With the remaining $200,000, the couple could name additional qualifying beneficiaries on the POD account, invest in a qualified retirement account at the bank, or deposit the funds at another bank in order to receive deposit insurance on those funds.

Account Title	Account Balance	Amount Insured	Amount Uninsured
Joint Savings Account	$700,000	$500,000	$200,000
Husband Single Account	$250,000	$250,000	0
Wife Single Account	$250,000	$250,000	0
Husband Account POD to Wife	$250,000	$250,000	0
Wife Account POD to Husband	$250,000	$250,000	0
Joint Account POD to Two Children	$1,000,000	$1,000,000	0
Total	$2,700,000	$2,500,000	$200,000

Conclusion

By utilizing a mixture of accounts across the spectrum of ownership categories insured by the FDIC, depositors can expand their deposit insurance coverage at a particular financial institution. Please remember that it is the ownership category of these accounts (i.e., single, joint, revocable trust) and not the type of deposit account (i.e., checking, savings, CD) that provides the eligibility for additional coverage.

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Click Here for a list of all failed financial institutions insured by the FDIC.

Also, on its website, the FDIC has a deposit insurance calculator to help determine the extent of a depositor’s insurance coverage; Click Here to view the calculator.